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How to Build Wealth from Nothing

by Rob Bertman, CFA, CFP® in Budgeting, Savings Rate, Wealth building
February 21, 2021
how to build wealth from nothing

How to Build Wealth from Nothing

Sometimes we feel like it’s too late. We didn’t get started building wealth early enough.

Years of working have passed and we have nothing to show for it but a measly bank account balance, credit card debt, and a small amount of retirement savings.

But it is possible to build wealth from nothing no matter your age and stage of life. Yes, it’s never too early, but it’s also never too late to start building wealth.

People do it all the time even despite the most adverse circumstances and at every age.

How do you start on the path to financial freedom by building your net worth?

What is wealth? 

The definition of wealth is the money you’d have left over if you sold everything you own, took all of your cash and investments, then used it to pay off all of your debt. 

To calculate your net worth (aka wealth), start by adding up every account that has money in it (bank accounts, retirement accounts, college savings, brokerage accounts, etc) and everything you own of value (house, cars, etc).

Then subtract everything you owe – all of your debts (credit card debt, student loans, auto loans, mortgage, etc).

Wealth is what’s left over. This number can be positive or negative.

What is wealth?

Why is wealth important? 

Wealth is what supports your lifestyle if you didn’t have any income coming in from working. It’s what allows you the flexibility to do what you want when you want.

Your net worth is an important number if you want to reach financial independence. At first, wealth building happens when you add money to your personal balance sheet.

But depending on what your balance sheet looks like, your wealth can actually grow on its own without any extra contribution from you.

Think of it like raising a kid. 

When you have a baby, you have to invest a lot of time and energy into feeding them, getting them dressed, and watching them as they play. 

But as they get older, they start to do these things on their own without you having to do it for them. The work you put in has paid off and now you have more free time…hopefully 🙂

When you’re building your wealth, it’s like having a baby you need to nourish and take care of. Just as your kids will reach independence, your wealth will too, allowing you to decide whether or not you want to keep working or not.

How to build wealth

The first step to build your wealth actually doesn’t have anything to do with how much money is going towards saving, investing or paying off debt. (I’ll show you that in a bit though.)

The key to building wealth is having money left over at the end of the month. This is a tough struggle for many, but that’s because we start with a budget rather than these steps first. Budgeting doesn’t work as a starting point.

It starts with understanding where your money is going, what you own and who you owe.

Only after you know that information can you figure out the best way for you to build wealth.

How to build wealth

Step 1: Track your spending

Before we understand where to put your money so that it builds wealth, we need to understand where it is going right now. 

We’re not trying to figure out where to cut just yet. We’re just getting an understanding of our current situation.

Once we understand how much money is coming in and how much is going out (aka your cash flow), then we can determine how to find more of it, and how to redeploy it to build your wealth.

Step 2: Make a list of your assets and debt

What you own (assets) and what you owe (debt / liabilities) is how you figure out your wealth.

Here are some examples of assets you might have:

  • Checking/savings accounts
  • Retirement accounts (401k, 403b, IRA, Roth IRA, etc)
  • Brokerage account (non-retirement investment account)
  • House/Condo
  • Custodial accounts for your kids / 529 plans
  • Cars

Here are examples of debt:

  • Credit card debt
  • Line of credit
  • Personal loan
  • Auto loan
  • Student loans
  • Back taxes to the IRS
  • Past due bills / Medical bills
  • Mortgage
  • HELOC or home equity loan

—If you want to be sure you catch everything on your list, get my free personal balance sheet template.—

Step 3: How much are you saving, investing and paying towards debt each month?

Add up all of your debt payments, automated savings, retirement plan contributions, and any other money flowing to your assets or liabilities.

This cash flow counts differently than your normal expenses like grocery shopping, your utilities, or taking a vacation, because this is money that is going toward building your wealth. (Yes paying down debt also increases your net worth too).

Step 4: Are you filling up too many buckets at once? Simplify and focus your payments!

Many clients I work with are trying to do the right thing, but they’re spreading themselves too thin. 

They’re paying a little extra on everything and feel like they’re making no progress. It would be better to take a laser focused approach and work on one thing at a time while making minimum payments on the rest.

In the end, they feel like they’re doing all this work with no tangible improvement. This can go on for years and years while feeling like they’ll never get ahead.

I’m sure you’ve heard of the debt snowball or debt avalanche. 

These methods are where you organize your debt from either smallest balance to largest balance (snowball) or from highest interest rate to lowest interest rate (avalanche) then pay them off in that order.  Every time you pay off a debt, you roll that payment to the next one.

I like either one, but to me, the most important thing is to check boxes and feel your progress so you’ll stick to it.

Pick one, get laser-focused until you knock out your debt one at a time, and build your savings one account at a time.

Step 5: Wealth Building Strategies – Set your financial foundation

Your money can go to one of four places:

  1. Spend
  2. Save
  3. Invest
  4. Pay off debt
Build wealth from nothing

Any money you spend will not go towards building your wealth. In fact, as one client told me, “Spending is transferring your wealth to someone else.”

But aside from that, you are building your wealth whether you save, invest or pay off debt.

Your financial foundation is what will give every extra dollar the maximum benefit to you. It includes one bucket from each of those three wealth building buckets.

Financial foundation for debt

The goal here is to get yourself 100% credit card debt free. (Yes, even if you have a 0% balance transfer).

Credit card debt is the gateway drug to financial ruin. It’s the toe over the line that gets people comfortable with debt (or as I like to call it, “money you’ve spent but haven’t paid for yet”). 

Once that happens, everything will go on payments. All of a sudden your monthly expenses are so high because of all the various payments you have.

Plus, these are among the worst interest rates out there which literally makes everything you buy more expensive than what you paid for it. 

If your card has a 15% interest rate, the bank is earning 15% off of YOU. With every $1 you pay it down, you are immediately getting a 15% return risk-free and tax-free. I would take that all day long.

All of that being said, if you have credit card debt, it’s important to let go of any shame or embarrassment you have. 

What happened in the past happened. Maybe you didn’t have a choice. Maybe you did. The important thing is what you are going to do going forward to get out of it.

Get credit card debt free and change your mindset that it is unacceptable to go back.

Financial foundation for investing

If you’re fortunate enough to work for an employer with a retirement plan, you’ll want to contribute enough to it to get the maximum match from them. 

For example, if they’ll match $0.50 for every $1.00 you contribute up to 5% of your income, then contribute 5% of your income.

This is the best place to start investing because, you’re getting a 50% return on your money. 

Plus it grows tax-free and should grow nicely over the long term. This is the biggest bang for your investment buck.

Financial foundation for savings

This is all about the emergency fund and it’s your #1 savings goal. Why is it important to have 3 months of expenses in cash?

Even though it won’t earn very much, it will prevent you from going into costly credit card debt if you have a negative financial event like a loss of income, car repair, home repair or even something great like a destination wedding (when we’re able to travel again).

Aside from the financial benefit, there is a bunch of stress reduction that comes from it.

I can’t tell you how many clients I’ve worked with that come to me on the vicious cycle of juggling bills and staggering payments because they’re waiting for the next paycheck to come in.

How nice would it be to have a cushion so you can pay a bill when it comes without the fear of zeroing out your bank account? Life-changing!

If you’ve never had a substantial amount of money in your checking account or savings account, start with building up to 1 month of expenses as your foundation.

Financial foundation summary

Wealth Building Strategies

You can deploy all of your extra money at these three items or pick one to go with first. 

If you’re debt averse, focus on the credit card debt. If you like investing, then get the max employer match first.

But don’t invest anywhere else, don’t save for anything else, and don’t make extra payments on any debt until you check all three of these boxes:

  • Credit card debt free.
  • 1-3 months expenses in savings.
  • Max match from your employer retirement plan.

How to create wealth within 10 years

Your starting point may seem bleak but you can create wealth no matter your starting point. Here’s how to get there whether you have loads of debt with little savings or you’re comfortable but want to get serious about building wealth.

Don’t worry. This isn’t about any financial planning or understanding complex investment advice like asset allocation. It’s really straightforward.

How to create wealth within 10 years

Step 1: Find money to put towards building wealth.

The #1 predictor of future financial success is having money left over at the end of the month. Right now, you might feel like there’s nothing to cut, but believe it or not there is.

The problem is that if I told you to cut your spending, you might not know where to start.

Try on my Keep, Cut Back, Eliminate framework as your starting point. This will help you easily identify how to cut your expenses without sacrificing your lifestyle or uprooting your family.

(Button to sign up for free consult).

Step 2: The 50/50 Rule – Lifestyle Creep + Boosted Savings

As your income grows over time, it’s important to take advantage of it to create wealth.

The good news is that there’s a way to increase your lifestyle AND create wealth as your income grows over time.

It’s called The 50/50 Rule. 

Every extra dollar that come from take home pay from bonuses, raises, tax refunds, etc can be split 50/50. 

At least 50% should go towards growing wealth on top of what you’re already doing. Start with putting it toward the financial foundations listed above

The other 50%? Feel free to spend it….Did you read that right?  YES, spend it.

Most people think they have to save everything or spend everything, this is the balance that will boost your wealth but also allow you to responsibly do more fun things along the way too (aka enjoy some lifestyle creep).

You’ll be amazed at the impact on your future wealth if you just follow this rule going forward.

Step 3: Commit to stop OWING and start OWNING

The best way to grow your wealth is to own stuff that should go up in value over time. Stocks, bonds, mutual funds, ETFs, real estate, your house, other real estate.

The worst way to grow your wealth is to always be owing someone else money, period. Shut the door on credit card debt, and say no to monthly payments of any kind.

Get rid of debt, and start owning assets.

Step 4: Work together

There are so many reputable studies proving that couples who work together on their finances end up being more financially successful over time.

If one of you is in charge of the family finances out of control or reluctance, it’s important to get the other involved. One of you can still do the majority of the work, but get together at least once a week to do a weekly spending review.

Step 5: Increase your income

There’s a reason this isn’t Step 1. 

Case and point: How much more are you making today vs your first job? Do you feel behind with your savings even though you’re making more money today?

The solution to building wealth isn’t to make more money. 

Yes, it helps and can be really great for building wealth, but not without steps 1-4 in place first.

What is the easiest way to build wealth from nothing?

The easiest way to build wealth from nothing is to start with focusing on your spending.  Remember that the money you have left over at the end of the month (aka your savings rate) is the #1 predictor of wealth, not income.

If you were to only implement one thing from this entire post, just start by tracking your spending. Believe it or not, that one habit can change your life.

Many of my clients have said they dread doing it, but after we do it together, they feel incredibly relieved. Why? Because now they know what they need to do.

Take these steps one at a time and I am incredibly certain that you will build your wealth even if you’re starting from nothing.

If you need more help building your wealth:

or if you want to do more but aren’t ready to talk: